Warning Signs Envelope City Plan to Turn 101 Ash Street into Low-Income Housing

Editordude: The following two posts are on the new City of San Diego plan to turn 101 Ash Street into low-income housing. The first one is a comment on a July 2 U-T article on the plan by reporter Jennifer van Grove by Paul Krueger, a writer for the Rag. The second (below) is by Lisa Mortensen. 

By Paul Krueger

It’s a huge understatement to say there are “warning signs” about a new proposal to convert the asbesto-ridden 101 Ash Street high-rise into low-income housing.

And a City Council committee’s decision to move forward with the plan could pave the way for yet another financial fiasco tied to this Frankenstein property in the shadow of City Hall.

A private development team proposes to transform the vacant, scandal-plagued office building into 247 apartments for residents who make no more than 80 percent of area media income. The proposal also includes three units for managers, retail space, and a child care center.

The director of the city’s Economic Development Department told council committee members last week that the proposal “does just want the city needs in a time of crisis: big, bold ideas and a tenacity to re-envision a vacant, underperforming skyscraper into an exciting adaptive reuse conversion.”

But this initial proposal cries out for more detail, and taxpayers should demand that it be subject to a thorough review by an outside, independent real estate expert.

The obvious warning signs include:

• Council committee members Kent Lee, Sean Elo-Rivera, and Raul Campillo voted to move the proposal forward to the full council despite the lack of any detail about the development agreement, which was not completed in time for the committee meeting. (Committee member Vivian Moreno, who has been an outspoken critic of the city’s real estate department, was absent.) The missing documentation is crucial, and the committee should have kicked the proposal back to staff for more detail before any discussion of the proposal.
• The city has invested more than $200 million in the much-villified lease, remediation, purchase and legal costs related to the Ash Street building. But it now values the property at just $45.6 million. One real estate expert who is very familiar with the property says the council should demand more information about “sudden devaluation” of the property.
• The development team of MRK-Create says renovation will cost $250 million, which translates to approximately $1 million per apartment. The developers are banking on the receipt of $114 million in tax credits, which they may — or may not — obtain. (The Midway Rising project has been unable to obtain those tax credits, despite years of effort.
• The cost of asbestos removal is estimated at $40 million, and remodeling is expected to cost $67 million. If we’ve learned one thing from the city’s botched real estate deals, it’s that “estimates” almost always come in low, especially with asbestos mitigation and the ever-increasing cost of material and labor. Our real estate expert also asks why the city is spending millions to relocate its Development Services Department to new offices if it could occupy the Ash Street building after removing the asbestos.
• The MRK-Create team is also counting on $32 million from historic building tax credits, but 101 Ash Street is not a historic building, and it’s not located in a historic district.
• Though taxpayers won’t give the developers a cash subsidy for the project, it is essentially loaning them $46.5 million in the form of a seller’s note. Repayment on that note won’t start for 15 years, at which time the city will receive yearly payments equal to 50 percent of the assumed rental proceeds, minus expenses
• *Because the city will continue to own the property, our real estate expert notes that any lawsuits that arise as a result of the development or its operation will draw in the city — and taxpayers — as a co-defendant. A lawsuit related to problems with the elevators at a Father Joe’s affordable housing project is just one example of the big-ticket litigation problems that haunt affordable housing development.
• Last — and certainly not least — of the red flags is the $24.5 million fee that the development team will collect. The developers are not investing any of their own money, which minimizes — or even negates — their risk. And one of the developers — Kelly Moden — is Mayor Todd Gloria’s ally, and his appointment to the Planning Commission, which she now chairs.

So really, what could possibly go wrong with this latest “big and bold idea” from the experts at City Hall?